At 9:30 this morning, the President spoke on the continuing
negotiations with Congress to pass a plan to address the credit
crisis. The gist of his remarks was: If it be done, let it be done
quickly. Conservatives must append a further mandate: If it be
done, let it be done constitutionally. Constitutionality is not a
mere feature of legislation; it is a threshold requirement. All
Members of Congress take a pledge to "support and defend the
Constitution," and that duty does not fade away in a time of
crisis -- indeed, it is then especially that constitutional fidelity
is most crucial and most endangered.

The secretary of the Treasury's original bailout plan was met
with concern by constitutionalists for its shortcomings in
adherence to fundamental principle. In particular, the plan was
criticized for its inattention to the federal government's
enumerated powers, the lack of meaningful standards to cabin the
extremely broad grant of discretion to the Treasury secretary (the
"nondelegation" problem), limitations on judicial review over the
exercise of that discretion, and other separation of powers
problems. These failings render the Treasury proposal, and those so
far that have built on it, unconstitutional.

Below, we analyze the constitutional aspects of two current
proposals to address the credit crisis.

Fundamental Principles

If the bailout is to pass constitutional muster, lawmakers must
concern themselves with at least the following specifics, explained
in greater detail in our
previous memorandum (available on heritage.org), while keeping
in mind the broader outlines of its constitutional authority.

Type and Scope of Indebtedness. The type of
financial instruments or debt that the Treasury Secretary can
purchase, as well as the industries that may seek relief, should be
defined by statute carefully so as to limit the secretary's
discretion.

Standards to Guide the Secretary's Discretion.
Congress must craft legislation that contains an objective set of
criteria that would guide the secretary's exercise of discretion in
practice and not just in theory. As explained further below, the
criteria must be specific enough to distinguish between lawful and
unlawful actions.

Meaningful Judicial Review. Citizens adversely
affected by the government's actions must be able to seek a redress
in the courts for fundamental constitutional violations or damages
at law.

These fundamental principles are not met by the "Agreement on
Principles" negotiated last night by House and Senate leaders and
the White House and wrought into legislative text this morning.
Thus, our original analysis of that proposal remains relevant. The
new proposal feigns attention to this paramount shortcoming but
fails to fix it. The draft legislative text includes a long list of
"considerations" that the secretary "shall" consult when exercising
authority under the act. When deciding whether to purchase
particular assets from a particular institution, the secretary
would have to consider, among other factors, whether the purchase
would "provide[] stability or prevent[] disruption to the financial
markets or banking system," "help families to keep their homes and
stabilize communities," and "ensure[] that as many financial
institutions as possible participate in the program, without
discrimination … based on their size, geographic operation,"
and other factors.

Taken altogether, these vague, overlapping, and contradictory
"considerations" are both incoherent and empty. They contain no
limiting principle to define which acts are lawful and which are
not. The long list of "considerations" does more to expand the
secretary's possible range of discretion than to define it. Thus,
the list does not create a circumscribed delegation of authority
but instead preserves a blank check of legislative power turned
over to the Treasury secretary. The broad delegation of power to
the Treasury secretary therefore remains unconstitutional.

In contrast to a laundry list of considerations that a future
secretary could employ to justify anything at all, a constitutional
standard would provide objective criteria that define and limit his
range of action. For example, a constitutional law might state: "If
the secretary finds A, B, and C [which are all objective criteria,
and at least one of which is tied to a legitimate government
function], he may purchase…" By implication, that language
means that if the secretary cannot find those three criteria, his
action would be unlawful. That is what the Constitution requires to
render a grant of authority under law.

Further, the agreement includes new unbounded delegations to the
secretary of the Treasury. In addition to the power to spend up to
$700 billion, in total at any time, to purchase assets of any type
(the strictures on this grant are loosened from Treasury's initial
proposal to include equity investments), the agreement would also
direct the secretary to set standards for executive compensation
and allow him to exercise the powers that come with equity
ownership, including some degree of direct corporate control. To
the extent they would permit elimination of compensation for which
an executive has a vested contractual right, these provisions raise
significant taking and due process concerns.

Though the new proposal does reinstate judicial review, it does
so in a way that provides no firm standards to actually constrain
the secretary's discretion. The agreement would require that the
secretary be "prohibited from acting in an arbitrary or capricious
manner." But this standard of review is meaningless, or at best,
circular, if the secretary is authorized to do whatever he thinks
best. Despite this emptiness, it would still be an invitation to
litigation. Lawsuits will be plentiful, injunctions perhaps only
somewhat less so. Judges -- not the statutory text -- will determine the
bounds of the authority that the secretary may exercise. Judges,
however, cannot logically determine whether an action is arbitrary
or capricious when the underlying criteria for making such a
determination do not exist -- a recipe for judicial arbitrariness and
activism. Thus the review provision will sap the vitality of the
secretary's mandate while providing no objective criteria to guide
his acts. It is, at once, the worst of both worlds.

In lieu of providing clear policy direction, the proposal would
instead impose possibly unconstitutional oversight mechanisms. The
plan is weighted down with a "strong oversight board," "detailed
reports to Congress," an additional, questionably "independent"
inspector general, and additional audits by Congress's Government
Accountability Office. In this way, the legislative
branch -- seemingly so reluctant to exercise its policymaking and
lawmaking authority -- would interfere in the secretary's authority as
executor of the law, which is power delegated to him, through the
President, in Article II of the Constitution.

In particular, these constitutional breaches suggest bad policy
as well. Instead of writing detailed laws that the President is
then responsible to execute, Congress delegates vast new authority
to the executive branch to "fix" he problem de jure and
then tries to invent new ways to micromanage and nitpick the
exercise of the authority. Such a power -- sharing
relationship is the exact opposite of the constitutional separation
of powers perfected by the Framers of our Constitution. Ignoring
that command abandons a great and durable mechanism of
accountability that empowers citizens to punish public officials
whose performance is sub par. All that remains is partisan
bickering, finger -- pointing, and reprisals.

As an example of a proposal that avoids constitutional pitfalls,
the Republican Study Committee (RSC) has released an independent
plan to address the current economic malaise. Without commenting on
the policy merits, we analyze here that plan's constitutional
status.

Like the "Agreement on Principles" described above, the RSC
proposal exists as a set of "principles" rather than fleshed out
legislative text. These principles are very different from those in
the leadership/White House proposal. The RSC would expand the
federal government's insurance of mortgage -- backed securities to
cover the entire market, up from half at present. This expansion
would be funded by assessing premiums on the holders of those
assets. Temporary tax relief provisions, including perhaps a
moratorium on the taxation of capital gains, is designed to free
capital to circulate in the economy, and a temporary suspension of
dividend payments by regulated financial institutions is intended
to the same end. Finally, the plan would enact a variety of
regulatory changes: revision to the accounting of mortgage -- backed
securities and reporting requirements regarding them; changes to
the mandates of the "government -- sponsored enterprises," such as
Fannie Mae and Freddie Mac; mandatory audits of the books of failed
companies; and requirements that the SEC, Treasury, and the Federal
Reserve issue further policy recommendations to Congress no later
than January 1, 2009.

Most strikingly, this proposal appears to raise no serious
issues of improper delegation. Its mandates are far more modest
than those in the leadership/White House proposal, and it seems to
spell them out in sufficient detail to pass muster both under the
Supreme Court's jurisprudence on delegation and the actual
Constitution itself.

Further, there is certainly less question of whether the RSC
proposal is ultra vires -- that is, beyond the powers
enumerated in the Constitution -- because it requires no new acts of
the government. It would primarily expand several existing
programs -- in size but not in scope -- and modify existing regulatory
regimes. Its chief component, temporary changes to the tax system,
is well within the government's power to tax, and its expansion of
government insurance for mortgage -- backed securities at least raises
no new constitutional issues, especially if it is implemented in a
manner similar to the Federal Deposit Insurance Corporation -- as a
voluntary mechanism.

Due primarily to its specificity, the RSC proposal avoids
constitutional pitfalls. This conclusion does not, of course, speak
to its economic merits, but it provides an example of the
principles necessary to pass constitutional muster.

A Constitutional Duty

The RSC proposal suggests that Congress can put together a plan
that does not violate our fundamental law. Those who, for reasons
of economic policy, favor the leadership/White House proposal must
correct its Legal flaws if they seek, in good faith, to uphold
their duty to the Constitution and the people. To do otherwise
would be to set bad precedent that may stain constitutional
practice for generations to come.